(January 16, 2015) 

On January 16, 2015 the non-confidential version of the decision of the European Commission from October 7, 2014 to open an investigation into transfer pricing arrangements on corporate taxation of Amazon in Luxembourg was published.

The European Commission has extensively argued why its preliminary view is that the tax ruling that Luxembourg issued on behalf of Amzon on November 5, 2003 constitutes State aid within the meaning of Article 107(1) TFEU and why at this stage the European Commission has doubts as to that ruling’s compatibility with the internal market. Therefore the European Commission has opened an investigation into the matter.

Although the European Commission mentions several reasons why it feels the ruling might constitute State aid, the problem mainly seems to have been caused by the fact that the Amazon and the Luxembourg authorities agreed upon an other pricing method to be used as the ones mentioned in the OECD Transfer Pricing Guidelines, being: (i) the comparable uncontrolled price method; (ii) the cost plus method; (iii) the resale minus method; (iv) the transactional net margin method or (v) the transactional profit split method.

Although the European Commission seems to agree that Multinational corporations retain the freedom to apply methods not described in those OECD Transfer Pricing Guidelines to establish transfer prices, provided those prices satisfy the arm’s length principle, the Commission seems to struggle with the fact that the Luxembourg authorities and Amazon decided to agree on another method.

A second important reason for the European Commission’s decision to open an investigation seems to be that the Luxembourg authorities have not provided the European Commission with a copy of an economic analysis of functions and risks that LuxOpCo (an Amzon entity) was anticipated to undertake.

With respect to its investigation, the European Commission has requested Luxembourg to submit its comments and to provide all such information as may help to assess the aid/measure, within one month of the date of receipt of this letter. In particular: 

-        to provide a copy of the economic analysis referred to in recital (35), if such an economic analysis exists;

-        to explain the reasons for deviating from the OECD transfer pricing methods when setting the remuneration of LuxOpCo;

-        to provide a detailed description of the IP for which Lux SCS (an Amazon entity) receives a royalty from LuxOpCo; and

-        to provide the amounts of the royalties paid by LuxOpCo over the past ten year accounting period to Lux SCS and the accounting figures on the basis of which the royalty has been calculated in each accounting period.

For further information and for the text of the non-confidential version of the decision of the European Commission from October 7, 2014 to open an investigation into transfer pricing arrangements on corporate taxation of Amazon Luxembourg as published on the website of the European Commission click here. The website of the European Commission will open in a new window.

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